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Crane v. Admiral Insurance Co.
Citation: 2013 IL App (1st) 093240-BDocket: 1-09-3240 Official Report
Court: Appellate Court of Illinois; June 4, 2013; Illinois; State Appellate Court
Original Court Document: View Document
In John Crane, Inc. v. Admiral Insurance Co., the Illinois Appellate Court addressed a complex dispute concerning the allocation of primary, excess, and umbrella insurance coverages for asbestos-related claims against the plaintiff, John Crane, Inc. The court affirmed the trial court's ruling that the horizontal exhaustion doctrine necessitated the plaintiff to exhaust all primary policy limits before any umbrella or excess insurers were required to contribute, irrespective of any renegotiation attempts with the primary insurer. The court clarified that, due to the plaintiff’s no-settlement policy regarding asbestos claims, all triggered excess or umbrella policies would be jointly and severally liable. Additionally, the plaintiff would not have to demonstrate all three triggers for asbestos coverage as outlined in prior case law; coverage would instead be activated merely by proof of exposure, sickness, or disease. The court's judgment was affirmed in part and reversed in part, with directions for the lower court. Panel PRESIDING JUSTICE HARRIS delivered the court's judgment, joined by Justices Quinn and Connors. John Crane, Inc. appeals a circuit court judgment regarding its first amended complaint against various insurance companies, collectively known as CNA, TIG, Allianz, and AIG-related Companies, seeking a declaration of rights. Crane argues that the trial court erred by (1) ruling that the agreement concerning coverage (ACC) could not establish that Kemper’s primary policies were exhausted by November 2004, (2) applying a pro rata allocation of payments from excess and umbrella insurers instead of an “all sums” allocation, and (3) interpreting Zurich Insurance Co. v. Raymark Industries, Inc. to require Crane to prove all three trigger dates to demonstrate the exhaustion of its primary policies. The CNA defendants cross-appeal, asserting that the trial court mistakenly concluded that mere exposure to asbestos counts as bodily injury under Zurich and did not adopt an equitable continuous trigger. On March 5, 2013, the court partially affirmed and reversed the trial court's decisions and remanded the case with directions. The CNA and Allianz defendants subsequently sought rehearing, which was granted, leading to the issuance of this opinion reaffirming the prior judgment with adjustments. Jurisdiction is confirmed based on the circuit court’s order from November 13, 2009, which resolved all claims in Crane’s complaint except one counterclaim, stating there was "no just reason for delaying either enforcement or appeal." Crane filed a notice of appeal on November 25, 2009, establishing jurisdiction under Illinois Supreme Court Rules 304(a). The trial court oversaw extensive discovery, 25 summary judgment motions, and two trials over nearly five years, producing six detailed opinions and a record exceeding 200 volumes. Relevant background indicates that Crane, a manufacturer of sealing systems, produced gaskets containing asbestos prior to 1986 and held primary insurance policies with Kemper from January 1, 1944, to August 1, 2001, totaling $41,075,000 in policy limits, with a duty to defend and coverage for defense costs above policy limits. Crane acquired umbrella insurance coverage in multiple periods from various insurers, including CNA, Allianz, TIG, and Kemper. From 1979, Crane faced over 250,000 asbestos-related bodily injury claims, with Kemper initially defending Crane under a no-settlement policy. In 2002, due to financial difficulties, Kemper and Crane entered into an agreement (ACC) to address coverage issues for asbestos claims. This agreement amended Kemper's policies, changing the limit structure and including a new $70 million supplemental excess policy while maintaining the no-settlement strategy. Additionally, the Caruolo agreement was established regarding a separate case, allowing for a payment allocation affecting policy limits. In 2004, Crane filed a declaratory judgment claim, asserting exhaustion of its primary insurance and seeking clarification on the obligations of its umbrella and excess insurers. CNA counterclaimed, disputing coverage triggers and exhaustion claims. Crane later sought a partial summary judgment for an "all sums" payment allocation, which was contested by CNA and Allianz. Ultimately, the trial court ruled for a pro rata allocation for excess and umbrella insurers, denying Crane's motion for an "all sums" approach and granting Allianz's cross-motion on pro rata allocation. The trial court determined that Crane and Kemper could retroactively amend their post-1986 policies without consulting nonprimary insurers, as those insurers had not issued policies to Crane after 1986. Kemper and Crane contended that Kemper’s primary insurance was exhausted in November 2004; however, the court decided it could not address this until the validity of the agreement (ACC) and the parties' intent were resolved. The court also required the parties to discuss the severability of the agreement in case any provisions were deemed invalid. It later ruled that sections five and six of the ACC, which address trigger, allocation, and cost recovery, were severable and that the core purpose of the ACC was to resolve the no-settlement strategy between Kemper and Crane. An exhaustion trial was scheduled to determine if Kemper's primary policies were exhausted, allowing Crane to use the ACC for this purpose under the horizontal exhaustion doctrine. Following the court's April 12, 2006, order, excess carriers, including TIG, successfully moved for a pro rata allocation ruling on their excess policies. On October 30, 2006, Crane and Kemper entered a settlement where Crane released Kemper from all further obligations under its primary and umbrella policies for over $20 million and assumed any obligations Kemper would have had. Consequently, Crane acknowledged that it stood in Kemper's position. On October 16, 2007, the court ruled on whether Crane, in Kemper's position, could use the policy limits established by the ACC to demonstrate exhaustion or was required to prove exhaustion of Kemper’s original limits. Citing several precedential cases, the court confirmed the application of the horizontal exhaustion doctrine, which necessitates exhausting all triggered primary insurance before accessing excess policy coverage. It emphasized that insureds cannot selectively render policies unavailable for the application of this doctrine. The trial court addressed Crane’s assertion that the original policy limits of Kemper were rendered unavailable due to the ACC and the 2006 Settlement, which Crane claimed retroactively amended the Post-1986 Policies. The court ruled that Crane could not make the original limits of liability inaccessible through such amendments, emphasizing that for the umbrella or excess coverage to be activated, Crane must demonstrate that the original policy limits were exhausted, which were set at $2 million per year excluding defense costs. On December 20, 2007, following a medical trial, the court affirmed that exposure to asbestos constitutes bodily injury, thereby triggering the relevant policies. It rejected Crane's continuous trigger argument, concluding that there is no automatic progression of bodily injury from exposure to diagnosis. Instead, the court adopted Zurich’s triple trigger, which activates policies in effect during exposure, the years of illness, and the manifestation of the disease, while clarifying that any mutations between the end of exposure and the onset of symptoms do not create a new claim. The court determined that there was a single occurrence, applied Zurich’s triple trigger for policy exhaustion, adopted the doctrine of horizontal exhaustion, and mandated that Crane must demonstrate exhaustion of the original primary policies as issued. A bench trial was scheduled to assess whether Crane proved that payments on the first 67 claims exhausted Kemper's primary policies from 1944 to 2001. The parties agreed on Kemper’s original primary policy limits of $41,075,000, with $37,065,259 paid on 54 of the 67 claims, leaving 13 disputed payments totaling $14,804,583. Prior to trial, Crane presented witnesses regarding these disputes, which focused on the amounts paid and their allocations. Ultimately, the court found that Crane did not sufficiently prove six disputed payments, amounting to $8,832,467. During the exhaustion trial, Crane carried the burden of proving trigger dates and allocation. The trial court's memorandum opinion noted that Crane's sole expert witness, Mr. Jones, testified on trigger dates and policy exhaustion related to the 67 asbestos claims. Although extensive documentation was available, the evidence was condensed to four boxes for trial. The court highlighted that this was the first time Mr. Jones testified without having participated in the data collection process, raising concerns about the reliability of his testimony on insurance allocations. The trial court identified significant flaws in Mr. Jones’ methodology regarding the allocation of claims, noting that he failed to conduct an independent review of the claim materials. Key concerns included: (1) lack of verification of the representativeness of the four boxes selected from a total of 500; (2) uncritical acceptance of the contents of these boxes without assessing their reliability; (3) reliance on dates provided by Dr. Gron, whom he had never met, despite knowing she lacked experience in insurance allocation; and (4) limitation to reviewing only the materials chosen by Crane’s counsel, despite his willingness to review all 500 boxes if requested. The court deemed some documents used by Mr. Jones as untrustworthy, leading to the conclusion that Crane failed to prove the exhaustion of Kemper's primary policies related to 67 claims. Consequently, the defendants were ruled not to have coverage obligations under their umbrella and excess policies. In contrast, the trial court confirmed the validity of Bernard Mayer's claim based on stipulated exposure, sickness, and diagnosis dates, leading to an allocation against Kemper’s primary policies for indemnity of $1,329,795 for the Mayer claim. Additionally, the court addressed CNA’s motion to reconsider its previous ruling regarding Zurich’s triple trigger application for bodily injury claims. CNA's arguments, referencing New York and English case law to challenge the definition of "bodily injury" in the context of exposure and timing of claims, were rejected due to lack of new evidence or legal changes. Crane subsequently filed an appeal, while CNA initiated a cross-appeal. TIG's motion to strike parts of Crane's opening brief claims that Crane violated Illinois Supreme Court Rule 341(a) by including substantive arguments in footnotes, as well as misrepresenting facts and making misplaced arguments in the introduction, in violation of Rules 341(h)(2) and (6). TIG requests that all footnotes and any misstatements be removed. The court recognizes TIG's concerns about substantive arguments being placed outside the main body of the brief and potential attempts by Crane to circumvent the 70-page limit. However, the court denies the motion to strike, stating that it will disregard any unsupported material or arguments solely in footnotes. Additionally, TIG asserts that Crane waived consideration of language in its excess policy due to its failure to address TIG’s policy in the trial court and its omission of excess carriers in its request for reversal of a pro rata ruling. The court, however, finds that these legal issues have been thoroughly briefed and concludes that Crane's omission was a minor error in a complex case, thereby opting to address the matters on their merits. Regarding the substantive issues, Crane argues that the trial court erred in ruling that the parties could not use the ACC to determine the exhaustion of Kemper’s primary policies as of November 2004. Crane claims that if the ACC is deemed to properly amend the limits of these policies, the defendants concede that exhaustion occurred in November 2004. However, CNA's response to a motion for partial summary judgment indicates a conditional concession, stating that if the trial court rules in Crane's favor on the ACC, they can demonstrate exhaustion, but reserves the right to contest the ACC's validity if the appeal overturns the judgment. The court decides to address the exhaustion issue on its merits. The appeal centers on the interpretation of the ACC's provision regarding the application of previously excluded defense costs to policy limits in relation to proving exhaustion. The trial court ruled that Kemper and Crane could retroactively amend Kemper's post-1986 policies through the ACC without affecting excess insurers' rights, as none were issued post-1986. The court found sections five and six of the ACC severable and allowed Crane to use the ACC to demonstrate exhaustion at the Exhaustion Trial, which will determine whether the primary coverage is exhausted based on horizontal exhaustion principles. Crane previously released Kemper from its primary policies' liability in exchange for $10 million in 2004 and later released Kemper from all obligations under both primary and excess policies in 2006, with both settlements affirming the ACC's validity. The CNA defendants challenge the ACC's validity, claiming it was not entered into in good faith, alleging it aimed to prematurely exhaust Kemper's primary policies to the detriment of excess carriers. They argue that Kemper and Crane owed a duty to act in good faith, citing legal standards from Haddick v. Valor Insurance. The court's determination of a good-faith duty depends on the existence of a substantial likelihood of recovery exceeding policy limits and settlement demands. In this case, demands for settlement exceed the primary policy limits, which negates a plausible claim of bad faith against Kemper and Crane. The CNA defendants reference Schal Bovis, Inc. v. Casualty Insurance Co. to support their position, but that case involved a refusal to settle below policy limits, which is not directly applicable here. The evidence suggests that Kemper's and Crane’s no-settlement policy cannot be construed as bad faith, given the volume of asbestos claims and the established primary policy limits. Consequently, neither Haddick nor Schal Bovis supports the appellees' claims. Crane contends that the Amended Coverage Commitment (ACC) between Kemper and Crane was established to manage issues related to Kemper's defense of Crane in asbestos litigation. The ACC modified Kemper's primary insurance policies, allowing inclusion of defense costs within policy limits and committing to a no-settlement approach. Crane argues that parties to an insurance contract can amend its terms and asserts that excess carriers are not part of the agreements between Kemper and Crane or the ACC. There is no indication that the excess carriers relied on any post-1986 representations by Crane or Kemper, leading Crane to claim that the excess carriers lack the standing to challenge the ACC's defense cost terms. However, the court is not swayed by Crane's argument regarding the excess carriers' lack of standing. It highlights the principle that standing requires a party to show a legally cognizable interest affected by the outcome. The ACC's amendment to Kemper's policy limits, from $2 million per year excluding defense costs to including them, impacts the interests of the excess and umbrella insurers. The trial court ruled on whether the original or amended policy limits applied to demonstrate exhaustion. Under a 2006 settlement agreement, Crane released Kemper from further obligations for a lump sum, agreeing to assume those obligations. The trial court concluded that Crane could utilize the ACC for exhaustion purposes but was accountable for the original policy limits, not those amended by the ACC or the settlement. This determination was based on the horizontal exhaustion doctrine, which mandates that all available primary coverage must be exhausted before claims can be made against excess carriers, particularly when the excess policy includes an "other insurance" clause. The ruling referenced precedent from U.S. Gypsum and the Illinois Supreme Court's latest discussion on horizontal exhaustion in Kajima Construction Services, which involved the selective tender of claims and the applicability of coverage limits. The appellate court upheld the circuit court's summary judgment in favor of St. Paul and against Tokio, affirming the application of the horizontal exhaustion requirement by Illinois courts in various prior cases. It established that an insured must exhaust all available primary insurance, including periods of being uninsured or self-insured, before an excess policy can be accessed. The Illinois Supreme Court elaborated on the nature of excess insurance and the horizontal exhaustion doctrine, originally arising in the context of continuous torts or long-term environmental claims. Excess insurance serves as secondary coverage, activated only after the limits of primary insurance or self-insured retention are fully utilized. Therefore, excess policies do not provide collectible insurance until primary coverage is exhausted. The court emphasized that excess policies can be contingent on all triggered primary policies, irrespective of their policy periods. Consequently, Crane was required to demonstrate that all relevant primary policies were exhausted before the excess carriers would be obligated to contribute to any settlements or judgments. Although Crane contended that the excess insurers could not claim bad faith regarding actions taken after 1986, this argument did not negate the need to prove exhaustion of primary policies as mandated by the horizontal exhaustion doctrine. Crane did not provide case law supporting the claim that an agreement between an insured and a primary insurer can diminish the required exhaustion of primary insurance before umbrella or excess policies come into play. In the trial court, Crane asserted that its 2004 settlement with Kemper not only triggered all primary insurance policies but also exhausted them. However, Crane did not argue that any primary policies were untriggered when the ACC was established. The trial court's ruling, which necessitates Crane to demonstrate that all of Kemper's primary policy limits, as they existed before the ACC, were exhausted before excess carriers are obligated to contribute, is upheld. Crane further contended that the trial court wrongly permitted excess insurers to use a pro rata allocation for determining their liability. Crane referenced a ruling in Zurich, which it claims mandates joint and several liability for excess carriers for all judgments within any policy period. The Zurich case clarified that “bodily injury” encompassed injury, sickness, or disease, and that coverage is triggered if any of these occur during the policy period. The court established that “bodily injury” occurs upon inhalation of asbestos fibers, and insurers active during exposure must cover related claims. Additionally, the Zurich court addressed a request to adopt a pro rata allocation approach from the Insurance Co. of North America case, which was rejected by the appellate court due to policy language not permitting proration. The supreme court confirmed that insurers' obligations were activated by exposure during the policy period and supported a reasonable cost allocation based on the years of exposure. An insurer is required to provide coverage for claims involving bodily injury, sickness, or disease occurring within a policy period, as established by prior court rulings. The appellate court correctly rejected the pro rata allocation of defense and indemnity obligations among triggered policies, differing from the pro rata approach in Forty-Eight Insulations. Insurers contended that the trial court could apply a pro rata time-on-the-risk allocation method for damages owed by excess insurers, referencing several appellate cases, including Outboard Marine Corp. v. Liberty Mutual Insurance Co. and Federal Insurance Co. v. Binney. Smith, Inc. In Outboard Marine, the insured sought a declaratory judgment regarding its CGL insurers' duty to defend against pollution claims and the appellate court upheld the application of a time-on-the-risk allocation method based on a continuous trigger of coverage. The court distinguished this case from Zurich, emphasizing that Zurich dealt with bodily injury, not excess insurance. The U.S. Gypsum case supported the continuous-trigger theory for asbestos property damage claims, noting that "bodily injury" and "property damage" require different coverage considerations. The Gypsum court affirmed that continuous injury triggers can help equitably distribute liability among insurers when apportionment is challenging. The trial court correctly applied this rationale, identifying all policies as triggered by the ongoing contamination of Waukegan Harbor. In the Federal Insurance Co. case, a class action against Binney Smith alleged false advertising of non-toxic crayons due to asbestos content, prompting Binney to seek indemnification under its CGL policies. The appellate court determined that Federal Insurance should only be liable for about one-tenth of the total settlement due to its provision of advertising injury coverage for only 3 of the 30 years in question, applying a pro rata time-on-the-risk formula. This decision referenced the precedent set in AAA Disposal Systems, Inc. v. Aetna Casualty, noting differences with Zurich, which involved bodily injury claims and lacked policy period limitations. The court highlighted that the Zurich case did contain such limiting language, which justified joint and several liability under the "all sums" rule. Furthermore, the court examined the Missouri Pacific R.R. Co. v. International Insurance Co. case, where the trial court had certified questions regarding coverage allocation for claims related to noise-induced hearing loss and asbestos exposure. The Second District affirmed that the pro rata time-on-the-risk method from Outboard Marine Corp. v. Liberty Mutual Insurance Co. could apply, notwithstanding Zurich's rejection of a pro rata approach, as the latter was specific to its unique facts. The court emphasized that evidence should be presented to assess whether hearing loss could be allocated to specific policy periods; if not, the pro rata approach should be adopted. The reasoning applied equally to both the hearing loss and asbestos exposure claims. The court in Missouri Pacific relied on prior rulings, particularly Outboard Marine and U.S. Gypsum, to establish that "bodily injury" and "property damage" are distinct concepts requiring different coverage triggers. The U.S. Gypsum case recognized the need for a comprehensive approach to coverage triggers, particularly regarding asbestos exposure, where both bodily injury and property damage can evolve over multiple policy periods. The ruling affirms the use of a continuous trigger for property damage due to asbestos fibers, aligning with the triple trigger concept in Zurich. It emphasizes that all triggered policies are jointly and severally liable for asbestos-related injury claims, regardless of whether they contain “all sums” language, as long as they align with the language of the underlying primary policies. The court rejected the argument for a pro rata allocation of liability, stating that such an allocation was not mandated by the language in the policies and reiterating that joint and several liability appropriately applies in insurance cases, including those involving asbestos. Liability is limited to carriers with policies covering the relevant periods, with untriggered policies not contributing to the liability. Triggered policies are liable for "all sums" up to their limits without credits for uninsured years. The determination is rooted in contract law, emphasizing that it is unjust to assign damages to an insurer that did not agree to provide coverage during a specific time period. Crane contends that the trial court mistakenly ruled that Zurich requires proof of all three triggers—exposure, sickness, and disease—to establish exhaustion of policy limits. Conversely, CNA seeks a reevaluation of Zurich's interpretation, advocating for a continuous trigger approach from exposure to diagnosis or death, asserting no definitive point for the onset of injury can be established. Zurich identifies three triggers for asbestos-related coverage: bodily injury upon exposure, sickness defined as ill-health, and disease commencing at diagnosis or death. The supreme court in Zurich ruled against the notion of continuous injury between exposure and sickness due to a lack of evidence supporting such progression. The trial court, through a medical trial, concluded that advancements in medical knowledge did not substantiate claims of injury during the interval between exposure and sickness, thereby upholding Zurich's triple triggers. While the supreme court did not explicitly clarify if all three triggers must be proven for coverage, its language indicates that each trigger is distinct and coverage can be activated by any one of them. The court confirmed that bodily injury occurs when asbestos is inhaled, necessitating coverage from a policy active at the time of exposure. The trial court's interpretation that all three triggers need to be established for claim settlement is rejected; coverage is activated upon proof of any single trigger. A policyholder or primary insurer must demonstrate that all triggered primary insurance policies are fully exhausted before excess insurance policies can be activated for claims. Exhaustion occurs when no triggered primary policies remain to cover the payments. In its petition, CNA asserts that Crane holds the burden to establish the specific dates when the various policies become effective. Although CNA acknowledges that evidence for these specific dates may be lacking for some claims, it argues that there must be identifiable beginning and end dates for exposure to asbestos and for the resulting diseases. However, CNA fails to provide supporting evidence or case law for its claims, leading to the rejection of its argument. In a cross-appeal, CNA contends that the trial court mistakenly determined that "bodily injury" occurs at the time of exposure to asbestos, asserting this should be evaluated on a case-by-case basis. CNA refers to new medical evidence suggesting that "bodily injury" may occur with the first mutation leading to cancer, citing Nolan v. Weil-McLain as supporting this position. However, the court clarifies that Nolan did not address the exposure trigger for asbestos-related injuries and emphasizes that the current matter pertains to insurance coverage, not liability. The court reiterates that the issue is whether the damage falls within the policies' coverage provisions, not whether the insured is liable for the underlying claims. The court also notes that, per Zurich, asbestos-related diseases originate from inhaling asbestos fibers, with bodily injury occurring at or shortly after initial exposure and continuing throughout the exposure period. The supreme court in Zurich established that the determination of disease and sickness triggers must be made on a case-by-case basis. It affirmed that bodily injury occurs upon exposure to asbestos, mandating coverage from insurers active during that exposure. CNA's request to apply an equitable continuous trigger for insurance coverage—spanning from exposure to diagnosis or death—was denied. The court noted that expert testimony indicated no continuous bodily injury occurs from the end of exposure until the disease is diagnosable. As such, coverage for asbestos-related personal injuries is triggered by proof of exposure, sickness, or disease, without requiring evidence of all three triggers outlined in Zurich. The court remanded the case for exhaustion determinations, stating that Crane must show all primary insurance policy limits were exhausted before accessing excess policies. Additionally, any judgments or settlements paid by Crane or Kemper since the last exhaustion trial must be considered. The request for certification of importance under Illinois Supreme Court Rule 316 was denied, emphasizing the appellate court's limited authority in such matters. The judgment of the circuit court was affirmed in part, reversed in part, and the case was remanded for further proceedings consistent with this opinion.